PROSPECT of British American Tobacco (M) Bhd – Malaysia’s sole listed cigarette manufacturer – remains intact with its earnings expected to sustain at current levels going into 4Q FY2022.
The group is expected to continue to benefit from the full re-opening of the Malaysian economy and the resumption of international tourism and travel to bump up duty-free sales, according to Kenanga Research.
“However, we remain cautious of inflationary pressure and rising interest rates eating into consumer spending power,” opined analyst Tan Jia Hui in a results review.
“We believe the continued contractions in the premium and mid-range segments coupled with the increase in the VFM (value-for-money) market share could indicate some down trading within the customer base.”
BAT Malaysia’s quarter-on-quarter (qoq) net earnings was up 2.7% to RM75.25 mil for its 3Q FY2022 (3Q FY2021: RM73.25 mil) while its revenue rose 4.6% to RM666.9 mil (3Q FY2021: RM637.46 mil) in-line with a 4.9% increase in sales volume due to re-opening of the Malaysian economy.
For the nine-month period, the group’s revenue rose 2.8% to RM1.82 bil (9M FY2021: RM1.77 bil) but its net earnings stood at RM200.79 mil (9M FY2021: RM213.41 mil).
Looking at government regulation, Kenanga Research is wary that the proposed legislation has sent mixed signals for the outlook of the group.
“On the positive end, the proposed tightening of borders to combat smugglers proposed in Budget 2023 is expected to have a positive effect on the group as the black market continues to be the main concern for the sector, controlling a majority of overall market share (57.7% as of May 2022),” observed the research house.
“Conversely, the generational ban on smoking and vapour products limits the group’s long-term growth although the effects are not expected to be heavy in the short term given the relatively small size of the targeted age demographic of 18-21 (<5%).”
All-in-all, Kenanga Research has reiterated its “market perform” rating on BAT Malaysia but raised its discounted cash flow (DCF)-derived target price to RM11.45 (from RM11.20 previously) to reflect its anticipated stronger earnings in FY2022F/FY2023F in line with rise in sales volume.
In a related development BAT Malaysia managing director Nedal Salem said the group is encouraged by its 3Q FY2022 performance which was driven largely by domestic volume growth and continuous cost optimisation initiatives that improved revenue and profit from operations.
“BAT Malaysia is particularly optimistic and is working with the relevant government stakeholders in its drive towards reducing the tobacco black market in Malaysia in tandem with the Government’s announcement to introduce new measures to address the high level of cigarette smuggling in Malaysia,” he commented.
“However, we believe these enforcement initiatives must be accompanied by measures to address affordability pressures for consumers.”
With regard to the group’s business emphasis on tobacco harm reduction, Nedal encouraged the Government to establish scientific and evidence-based regulations which will provide the over one million Malaysians who vape access to products of known quality and safety. – Oct 28, 2022
